Microsoft Corp. (MSFT) is taking some big risks on the market. As a company long blasted for not pushing the bounds of user interface development and operating system functionality far enough, Microsoft has thought wildly outside the box to come up with truly unique user interfaces such as the Metro UI driven Windows Phone 7 and Windows 8. The latter product will be a key test for Microsoft when it launches later this year. The company faces the uneviable task of fulfilling conflicting objectives -- delivering a crisp, innovative experience suitable for tablets and desktops alike, while at the same time maintaining or improving on the core traditional desktop experience.

I. A Bullish Surprise

Whether Microsoft will rise sufficiently to the occasion remains to be seen, but the calendar Q1 2012 (fiscal Q3 2012) earnings reported [press release] late yesterday afternoon by Microsoft give cause for optimism.

Microsoft's core money-makers -- Windows 7, Xbox 360, SQL Server/System Center, and Office 2010 -- all posted impressive numbers. As a result Microsoft posted revenue of $17.41B USD and a net profit of $5.11B USD ($0.60 USD per share). The revenue was up 6 percent from last year, but profits were down one cent per share from last year, thanks in part to Microsoft's heavy spending.

But the key thing is that Microsoft blew past analyst expectations of revenue $17.176B USD and net profit of $0.5748 USD per share. In fact, Microsoft's earnings nearly matched the most bullish of analyst estimates.

Windows 7 continues its meteoric rise as the world's fastest growing operating system in history, claiming a 40 percent market share. Sales rose to $4.62B USD, up 4 percent from last year. SQL Server and System Center followed in suit, with the former growing by "double digits" and the latter growing 20 percent. Overall the server division raked in 14 percent more than last year, for a total of $4.57B USD. Office 2010 sales continued strong, driving $5.81B USD in revenue -- a 9 percent increase.

Xbox 360 sales fell 16 percent on a year-to-year basis, but Microsoft was able to hang on to its lead in U.S. console sales for a fifteenth straight month. Xbox Live now has 40 million members worldwide, and the division pulled in $1.62B USD.

II. Outlook

Two big questions face Microsoft -- how to reinvent the winners (Windows, Office, Xbox) and how to salvage the losers (Bing, Windows Phone).

In the winners department, Microsoft is rumored to be preparing the Xbox 360's successor for a fall 2013 launch. Code-named Durango, rumor has it that Microsoft is handing out development kits based on a 16-core PowerPC architecture central processing unit from International Business Machines, Inc. (IBM) and a Radeon 7000 series card from Advanced Micro Devices, Inc. (AMD). The device will need all that power; it is supposed to launch alongside a next generation Kinect (Kinect 2), which will be capable of tracking users' movements down to their fingertips.

Fran Shammo, CFO and EVP of Verizon Wireless -- a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD) -- called Microsoft a key "third ecosystem" that his company hopes to cultivate.

He comments [call], "I do think, though, it is important that there is a third ecosystem that is brought into the mix here, and we are fully supportive of that with Microsoft. And as we said that we created the Android platform from beginning, and it is an incredible platform today that we helped create, and we are looking to do the same thing with a third ecosystem. So that is how I think that we plan to go into the future here."

Here's the thing: AT&T is known to be for Apple sheep, almost all non-Apple fans are on Verizon (and others). I was astounded that MS would choose AT&T as their network, that was as bad a mistake as Win8 is going to me.

YES, put WP on Verizon. I'm not leaving Verizon just for a phone, but I would like a Windows phone if I could get get one. This is a DUH moment for MS.

I'm not sure what you're trying to say. Microsoft put Windows Phones on several carriers. Verizon HAS a Windows Phone. It's Verizon's fault that they never promoted it, nor tried to get another one. Microsoft had enough and pushed AT&T as the premier carrier. This is a DUH moment for Verizon, as Lumia 900 is selling like hot cakes.

Microsoft wants as many WP devices on as many carriers as it can get. Verizon holds the power in their relationship. As the US's largest cell carrier, Verizon can just hold out for a sweetheart deal from Microsoft, unless WP started to become so popular that Verizon just has to have it to compete. Verizon sees that Microsoft is paying off crucial players to support WP so why not them too?

i know a local verizon rep well (a state wide biz development rep, not a kiosk clerk). im on verizon i have a razr, i ask all the time when i can get a nokia wp7 phone. he keeps saying that verizon will take a deal with windows and nokia when they are ready with 4g let hardware that will run wp7. verizon doesnt seem to want "older" hardware on their fast network. especially phones that should be top of the line. they want the phone to feature all the latest and greatest.

i seriously would carry a wp7 device if it had 4g and wifi tethering, wp7 is the best biz devices out now. the exchange and sharepoint features are killer.

The Nokia is 4G and Windows Phones have WiFi tethering since they released 7.5.

Verizon is going to do a huge launch of the Windows phones around the holidays the end of this year. They want a 3rd member to break up the iPhone or Android option and they say they made android what it is and they will promote the Windows Phones more than they promoted Android. They should because AT&T is having a lot of success with the Nokia devices selling out.

Nonsense. The hardware is all available, you honestly think that if Verizon wanted a device that their partners wouldn't build one? Hey, I've got a bridge for sale. Good price!

Verizon just didn't want much to do with Windows Phone until two things happened: One, WP7 got LTE. Two, AT&T started getting serious about it with their launch of the Lumia 900.

Combine that with the fact that their sales reps got more cash money to sell the latest Android phones and iPhones, and it is easy to see why WP7 has such a weak showing on Verizon. The only thing MS has done wrong is not provide enough cash incentive to sales personnel. Other than that, every fault lies with Verizon - and I say this as a loyal Verizon customer.

Can't be that many of them as over half the smartphones sold by Verizon were iPhones.

From Forbes 4/19/2012

quote: In reporting Q1 results this morning, Verizon Wireless noted that it sold 3.2 million Apple iPhones in the quarter, about 51% of the smartphones the carrier sold for the year’s first three months. That’s actually down from 4.2 million phones and 54.5% of smartphones sold in the December quarter, but above the year ago levels of 2.2 million iPhones, and 32.8% of Verizon’s smartphones sold.

quote: Can't be that many of them as over half the smartphones sold by Verizon were iPhones.

Way to mistake the number of phones sold in a quarter of time for the number of phones on the network. At last check, 81% of the smart phones on the Verizon network were not iPhones. Apple would need to keep up that sort of quarter for around 7 years just to get to the sort of 50/50 split that you are trying to state as fact.

quote: Way to mistake the number of phones sold in a quarter of time for the number of phones on the network. At last check, 81% of the smart phones on the Verizon network were not iPhones. Apple would need to keep up that sort of quarter for around 7 years just to get to the sort of 50/50 split that you are trying to state as fact.

So Android used to be popular on Verizon but now not so much. Well not since Verizon customers got a chance to buy the iPhone.

By the way care to post the source of your data and tell us how many installed Android handsets there are at Verizon?

So the numbers from memory were actually a bit bullish since 83% of all smartphones on Verizon are not iPhones. Once you go beyond that to include smartphone customer growth rates on Verizon you start to realize it would take Apple a long time to hit the sort of 50/50 market share you were espousing.

quote: How many installed Android handsets there are at Verizon?

I don't see how that is even relevant, I was just calling attention to your assertion that this was some form of writing on the wall.

You only need to look at the recent rapid decline of Apple's stock price to realize that they've entered a correction phase. If you managed to get out above $600, my hat goes off to you.

The statement was that all non-Apple fans go to Verizon. The sales numbers clearly indicate that as of Q4 '11 and Q1 '12 that Verizon sells more iPhones than it does all other smartphones combined. Keep in mind that Verizon sells a lot of blackberries on top of their Android phones. This real data seems to indicate that Apple is extremely popular on Verizon.

Releasing on AT&T rather than Verizon was not a mistake. It was a result. The mistake itself happened years back.

Here is why:

1. Verizon is getting butt handed to them by iPhone on AT&T, needs a stopgap until they can get iPhone, or a full on competitor.2. MS Buys danger, intends to deliver to Verizon3. MS decides to rewrite to WinCE, adds ages to dev time**4. Kin1/Kin2 release way late,5. Verizon gets burned, and has in meantime found android.6. Verizon retaliates with $30/mo data pricing for Kin basically killing it on arrival.++7. MS is now burned. Indicates Verizon will *not* be the primary launch partner for WP8. Verizon goes ha-ha.9. WP gets great critical review, weak sales.10. AT&T decides to pimp the new Nokia WP11. Lumias sell out in stores and online.12. Verizon goes d'oh!!

As other have said, the reason there isn't a new WP7 device on Verizon right now is 100% Verizon's decision. Now that WP7 has LTE and AT&T is pushing the Lumia 900, Verizon is finally changing their tune. Personally I couldn't give two dukes about LTE at this point. It isn't available in my area, and I've got unlimited 3G right now. If I go LTE I get some painful data choices, and if I even had LTE access, it eats power like crazy.

I'll be more interested in LTE when it less power-hungry devices come out with hardware built on smaller more efficient processes. Maybe by then it'll be more widespread and they'll have a halfway decent shared data plan that doesn't COMPLETELY rape us over and over.

I'm telling you, even if you had to make it dual core only, if you made a version of the Galaxy S3, same memory, same screen (including resolution) that ran Windows Phone, you would sell millions. There is a large segment of the market that is craving LTE, OLED 4.7" and something that isn't Apple and isn't Android.

However if they do this too late, after all the sales have already happened on the S3, then late is late and they'll be more than a few dollars short.

Unless you've actually used the damn phone, stop with the dual core crap. I have the lumia 900 and it's faster and smoother than more dual core phones out there. Wp7 is awesome, never hiccups, pauses, or crashes, runs silky smooth. I chose this over the iPhone 4s, I've had every version of the iPhone since its inception, even with a single core iOS is smoother than crapdroid. And this phone runs circles around the iPhone 4 and is pretty damn close in smoothness to the 4s. live tiles is great, people hub is great, and the outlook mail on wp7 rocks. I use my phone primary for business and as far as communication goes this has ios and crapdroid beat hands down, not even close. I can't wait for w8p to come out, don't know if I'll be able to upgrade or not, but it will put a hurtin on apple and google as desktop, tablet, and phone, become more unified and communicate better. Keep up the great work Nokia & Microsoft, I Love what you've done for me lately.

This is an analysis of Microsoft's financial relationship with Nokia and the revenue and expenditure implications for Microsoft. Interesting analysis and as is usual at Asymco well argued and thorough.

That's a good analysis. We know that HTC have to pay Microsoft $5 per Android handset, so I guess the $15 per Nokia handset is a reasonable assumption. It's a pity Nokia was so vague about this. They do say "We have a competitive software royalty structure, which includes minimum software royalty commitments," which, to me, would suggest Nokia would be paying closer to the $5 mark than the $15 if they had enough sales.Looking at the Nokia interim report, one thing of interest is that the North American market is the lowest earning market at Euro 93M / 0.6M units. The next highest earning geographical region is Latin America with Euro 542M / 9.6M units. China sold 9.2M units earning E577M.As you can see, the North American market is, currently, not one of their "major" markets. The interesting thing will be whether that trend will be reflected in the other markets.

I am waiting for a pureview phone to come to AT&T. When that happens I will run to my closest AT&T store and throw money at them.

Don't get me wrong, I love my Lumia 900 but I wants the pureview!

"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer